Why Emulex Corporation Shares Collapsed

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Emulex (NYSE: ELX  ) , a provider of network connectivity products that support telecom and cloud services around the globe, collapsed by as much as 30% after reporting disappointing third-quarter earnings results after the closing bell last night.

So what: For the quarter, Emulex reported a year-over-year decline in revenue of 6% to $109.7 million, and an adjusted profit of $0.15 per share on gross margin of 66%. Comparatively speaking, Emulex's EPS matched the Street, but revenue fell $3.1 million shy of estimates. Where the wheels fell off the wagon was Emulex's fourth-quarter guidance, which calls for revenue of $94 million-$100 million and an adjusted profit of breakeven to $0.05 per share. Wall Street's consensus had been expecting $0.18 in EPS and $115.4 million in sales. Ouch!

Now what: Emulex made certain to point out that many of its guidance factors could be beyond its control, such as the overall IT spending environment, but its report wasn't filled with a lot of substance that shareholders could grasp onto, including why its top and bottom line are deteriorating so much quarter to quarter. Emulex should be seeing robust growth as telecom spending to boost their infrastructure to support next-generation devices is soaring, but that's apparently not the case.

On the other hand, Emulex is now valued at only 80% of book value, is profitable, and has plenty of cash on hand for those inevitable industry downturns. For tech-savvy investors willing to take on a good amount of risk, Emulex could represent a long-term rebound candidate worth looking into.

Emulex may hold plenty of rebound potential, but it'll likely have a difficult time trying to keep pace with this top stock over the long haul
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Sean Williams

A Fool since 2010, and a graduate from UC San Diego with a B.A. in Economics, Sean specializes in the healthcare sector and in investment planning topics. You'll usually find him writing about Obamacare, marijuana, developing drugs, diagnostics, and medical devices, Social Security, taxes, or any number of other macroeconomic issues.

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5/5/2015 8:00 PM
ELX $7.99 Down +0.00 +0.00%
Emulex Corp CAPS Rating: **